Gennady
Stolyarov II is a science fiction novelist and philosophical
essayist, and is Editor-in-Chief of The Rational Argumentator.
He lives in Chicago.

AUSTRIAN ECONOMICS AND
KIRZNERIAN ENTREPRENEURSHIP

by Gennady Stolyarov II

Professor Israel Kirzner’s theory of entrepreneurship uses the
methods of Austrian Economics to explain the function of the man who
perceives and pursues economic opportunities in the face of
uncertainty. The entrepreneur, in seeking his own profit, is
essential to correcting mistakes in the structure of prices and
remedying the sheer ignorance and error exhibited by some economic
actors. His profits derive from the services he performs in
detecting and eliminating arbitrage opportunities, thereby allowing
supply and demand for a given good to meet.

Kirzner describes alertness as the fundamental quality of the
entrepreneur. Alertness is the entrepreneur’s ability to perceive new
economic opportunities that no prior economic actor has yet
recognized. The entrepreneur might foresee demand for a new product
that has not hitherto been manufactured; he might then decide to
manufacture that good himself. Alertness may also involve the
entrepreneur’s detection of arbitrage opportunities on the market:
opportunities to sell the same factor of production for a higher price
than he bought it. The entrepreneur’s alertness detects arbitrage
opportunities by recognizing that certain factors of production are
underpriced; he then proceeds to act on this knowledge to earn profit.

The entrepreneurial
function is possible due to the presence of sheer ignorance on
the part of some economic actors. Sheer ignorance, in Kirzner’s
definition, consists of not only not knowing a given piece of
information but also of not knowing that one does not know it: no
consideration of the information – positive or negative – even enters
the economic actor’s mind. Sheer ignorance is the basis for
uncertainty; economic actors neither know nor anticipate the future
perfectly due to their incapacity to foresee every datum in that
future. Future events might occur whose causes are not presently known
to the economic actors. Sheer ignorance is the root cause of sheer
error: mistakes made by economic actors as a result of not
anticipating these future events or knowing their present causes.

The entrepreneur
constantly remedies sheer ignorance and corrects sheer error. Through
his alertness, the entrepreneur foresees economic developments that
other actors have overlooked; he also recognizes where the other
actors’ lack of information has created mistakes in the price
structure and hence arbitrage opportunities for him. The entrepreneur
has an incentive to remedy the sheer error in the price structure,
since pursuing the arbitrage opportunity will result in personal
profit for him. He thus bids up the price of an undervalued factor of
production until the mistake in the price structure is corrected and
the arbitrage opportunity disappears. While he has remedied the
mistake, he has earned profit for himself – provided that his faculty
of alertness was indeed correct in suggesting to him that a mistake in
the price structure originally existed. The entrepreneur, too, acts in
the face of uncertainty in that he never has assurance that his
foresight into future market conditions is fully correct. He only
obtains certain knowledge of whether his activity was properly
directed after the fact: the only sure determinant of the success or
failure of his perceptive faculty is the test of profit and loss. If
the entrepreneur earns a profit, he has acted properly and usefully in
the face of uncertainty. If he loses money as a result of his
activity, he has evaluated the market mistakenly.

"Entrepreneurship is the alertness to and foresight
of market conditions; it must necessarily precede actions taken in
accordance with that alertness."

For Kirzner,
entrepreneurship is not just another factor of production.
Rather, it is “costless.” It does not involve the resource
expenditures necessary to obtain the services of land,
labor, or capital. One does not deliberately set out to
become an entrepreneur; nor does one exert oneself to
achieve entrepreneurial alertness. One cannot teach
oneself to notice economic opportunities in the face of
uncertainty. The noticing is primary and happens before any
entrepreneurial action is possible. In the real world, the
noticing is antecedent to all action, since all
real human action occurs in the face of uncertainty and thus
has an entrepreneurial component to it. One cannot be
taught entrepreneurial awareness in the same manner that
one can be taught management techniques or factual knowledge
or skill in a given line of work. Every entrepreneur does
use all of the above, along with taking calculated risks and
purchasing land, labor, and capital for his activities.
However, those functions are not in themselves
entrepreneurship. Entrepreneurship is the alertness to and
foresight of market conditions; it must necessarily precede
actions taken in accordance with that alertness.

A possible challenge to
Kirzner’s theory of entrepreneurship might cite the case of
the popular novelist who enjoys a stream of income from his
book. Was his activity entrepreneurial, having foreseen a
widespread demand in the market for his work? Such a
prediction necessarily involved uncertainty, since the book
had not existed before, and there was no way to anticipate
demand for it with perfect confidence. Or was his activity
an exertion of his skill and labor in writing the book? That
is, did the novelist write the book because he foresaw
market demand for it, or did the market demand occur as a
resultant side effect of the novelist’s writing the book?

Hypothetically, Kirzner’s
answer to such a critique would have distinguished the
author’s function as an entrepreneur from his function as a
laborer. The author acted as an entrepreneur to the extent
that he accurately foresaw the market’s demand for his
product and acted on this prediction. To the extent that he
created the literature as a means to his artistic expression
and the conveyance of his intellectual values and
observations – irrespective of popular economic demand – he
acted as a laborer toward his own consumption. Even the
actualization of his desire to sell the book, however,
required him to function in the capacity of a laborer in
actually writing it. The actual writing of the book was not
inherently entrepreneurial, though entrepreneurial alertness
may have led up to it and even justified it.

To challenge the
Kirznerian theory of entrepreneurship, “mainstream”
economists also refer to individuals’ intentional
undertaking of market research. Market research gives the
entrepreneur more accurate information on the basis of which
he might decide what economic opportunities exist and how to
benefit from them. However, market research is a systematic
endeavor, requiring expenditure of time and resources –
hence not being “costless” as Kirzner claims
entrepreneurship to be.

A defender of Kirzner’s
theory would state in response that the undertaking of
market research is not in itself entrepreneurship. Rather,
the exercise of entrepreneurial awareness occurs even before
the research happens. Entrepreneurship here would consist of
recognizing that the market research is a useful endeavor
to undertake in the first place. Once this decision is
made, the resource expenditures toward actually conducting
the market research are not strictly entrepreneurial.

Kirzner’s theory
underscores the importance of entrepreneurship to a
successful market economy. Entrepreneurship cannot be
taught; it cannot be planned or centrally managed. However,
it is indispensable to addressing the uncertainty inherent
to all human action and to allowing any mistakes made in the
face of this uncertainty to be corrected. The entrepreneur’s
selfish motivation for profit presents him with a reliable
incentive to remedy sheer ignorance and error in the
marketplace – thereby improving life for all.